World Economic Development

Anyone listening to the participants in the World Economic Forum, and the commentators on it, must come away with the feeling that there is an urgent need to shift from the capitalistic system that has been the mainstay of the Western World for many decades towards a system in which the ‘poorest of the poor’ play a dominant and decisive role.  While the sentiments behind this may, to a certain extent, be laudable, a realistic assessment of the winners and losers in the past decades must give rise to concerns in this strategy.

An undoubted winner in the past decade has been China, which has progressed from the stranglehold of Communism to a variant of capitalism.  In earlier years, China was backward and effective in the world largely through its massive population and its military muscle, brought about at the expense of the bulk of its population.  Then it changed its policies, driving industrial growth mainly by adopting capitalistic methods, and achieved economic wonders.  Those achievements continue to be at the cost of a large part of the population, the ‘poorest of the poor’.  It is generally accepted that, as the economic empowerment of the Chinese population progresses, greater heed will be paid to those poor, bringing them into the mainstream of the economy, and this will result in a slowdown of the economic growth of the country.

Let us digest the essence of this phenomenon.

Economic growth in China has been high at a time when the capital of the country was concentrated strongly in the hands of those whose interest was development.

In the United States, or Britain, in contrast, economic growth was similarly high at a time when the economic muscle of the country was concentrated mainly in the hands of the entrepreneurial class, whose interest was economic development.  However, that economic growth slowed, and even declined, as the policies of the Governments in power shifted to buying the votes of the ‘poorest of the poor’ by offering them increased handouts in the form of social benefits and improved working conditions.  There was a minor blip in this process when Maggie Thatcher faced down the Trade Unions and succeeded in moving the focus of the economy from support of the poor to support of the entrepreneurs who created the economic activity, and thereby the jobs.  However, over the past decades, economic growth has slowed, and a large part of the actual economic growth has not involved a large increase in employment.  The ‘plight’ of the poor has been alleviated to some extent, but an increasingly large number of middle class ex-workers has joined the ranks of the poor.

Let us digest this phenomenon.

Economic growth was high at a time when the capital of the country was concentrated strongly in the hands of those whose interest was development.  Economic growth slowed, or even went into reverse on a per capita basis when the wealth of the country was dissipated by the payment of social benefits to those who supported Governments that concentrated on spreading the wealth of the country.  It was said at the time that Harold Wilson, a Prime Minister who presided over the collapse of Britain as a world power, came to power with the desire to spread the wealth of the country amongst its population.  He found that he was unable to do so, and so settled for spreading the poverty amongst the entire population.

Do you recognise the moral of the stories?

The South African Government is facing an increasingly dissatisfied poor population.  These are people who are willing, even keen, to work, but who can’t find jobs.  This is the result of two main reasons, and several subsidiary causes.  The Government has worked assiduously to take wealth from those who create it, to satisfy the desires for increasing handouts by the non-working population.  A large number of the new jobs created have been in the Government sector, essentially a non-productive sector.  This diversion of wealth has decreased the ability of the entrepreneurs, the creators of wealth, to do their jobs effectively.  At the same time, the population has increased enormously in the nearly two decades of ANC rule, partly as a result of opening the country’s borders to foreign (African) immigration (remember that Thabo Mbeki stated that South Africa belonged to the Africans?), and partly as a result of the subsidisation of children, a factor largely concentrated in the poor, as the birth rate of the wealthier population has generally declined, and one which the Chinese recognised and countered with their ‘One Child per Family’ policy.  The lesson from the reunification of Germany is particularly relevant here.  West Germany, with 70 000 000 highly educated and productive citizens has battled since 1989 to upgrade the 15 000 000 relatively educated and industrially-competent citizens of East Germany.  South Africa is attempting to achieve the same result, with 3 000 000 economically active people supporting a total population, with low education and often very little industrial training, of over 50 000 000, and growing! 

A study covering several countries has shown that the average capital investment, in total, of creating a single new job in a developing country, amounts to about US$250 000!  The Government desires to create 5 000 000 new jobs over the forthcoming ten years.  That translates to a total investment of $US1 250 billion!  And that is where the industrialists are willing and able to co-operate, and are not faced with the numerous burocratic obstacles and labour market constraints that confound so many people of goodwill in South Africa.  And even if this goal succeeds, it will not meet the employment needs of the all new entrants to the job market in the first five years!

Subsidiary reasons include the high level of corruption present in the State, with many of the beneficiaries of corruption at the highest level of Government, resulting in many decisions being made to undertake projects which have the highest potential payoff to those in control, not necessarily those that are economically justifiable.  Numerous examples of this abound, ranging from a R54 billion splurge on unnecessary munitions, to a school building that costs nearly three times the cost that would normally be expected.  Another reason is that, in its drive to ‘africanise’ all State functions, a large pool of talent and experience was lost, and continues to be lost, as under-qualified and inexperienced Managers replace those who grew up through the ranks.  An interview of President Jacob Zuma after his State of the Nation address in 2011 highlighted this reason, as he explained that, after 16 years of ANC rule, the Government had now identified weaknesses in Government functions and policies in area after area, and was now introducing new policies to remedy these!  It did not seem to matter to him, or to the interviewer, that these weaknesses, which were known to most intelligent observers of the ANC bumbling, had cost many hundreds of millions and set the economy of the country back many years, or that the ‘new policies’ were very much untried and untested, and had as little likelihood of achieving their objective as had the policies now recognised as having failed! 

A further reason is that the ANC continues to experiment with public opinion by floating ideas such as the nationalisation of the mining industry or of agriculture through extremists such as Julius Malema, leading to considerable doubt amongst potential foreign investors regarding future policy direction, and, to a large extent, certainty amongst those foreign investors that the extremists in the ANC are destined to come to power, in many cases sooner rather than later.  If you were an investor in a new factory, where would you rather locate it?  Stable Brazil, or unstable South Africa?

Of course, this discussion is superficial.  Any discussion of economic questions needs diligent analysis by people with the mental equipment to understand the essence of the discussion, and with the inclination to deviate from their prejudices if this is warranted by the facts and the analysis.  For the purposes of this present discussion, several matters need to be recognised.

Economic development should be left to entrepreneurs with as little intervention by Government as possible.

The focus of development should be the development of business opportunities.  Creation of jobs and the economic development of the ‘poorest of the poor’ will follow.  Focusing on improving the state of the ‘poorest of the poor’ will inevitably lead the economy downhill.

The political leaders of the Government must be clean, and subject to rigorous scrutiny in all their dealings, both in the political sphere and in their private lives.  If they don’t want the scrutiny, it is probably an indication of their having a reason for this aversion, and they must leave politics.  If any dishonesty is found in any level of Government, it must be investigated by an independent body and guilty parties promptly and severely punished.

Potential investors, whether foreign or local, must be courted and treated with the respect that their scarcity and value to the economy deserves.